TD Bank 2006 Annual Report Download - page 38

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
34
BUSINESS HIGHLIGHTS
•Reported earnings up 49%, and adjusted earnings up
21%, from last year.
•Return on invested capital of 28%, compared to 22%
in previous year.
•Making progress towards being a top 3 dealer in Canada:
– #1 in equity block trading.
– #1 in fixed-income trading.
– #2 in fixed-income underwriting.
– #3 in equity underwriting (full credit to bookrunner).
– #3 in mergers and acquisitions (among Canadian peers).
•Realized strong security gains in the equity investment
portfolio while also increasing the unrealized gains from
the prior year.
•Completed the restructuring of the global structured
products businesses.
•Continued to maintain a low credit risk profile.
CHALLENGES IN 2006
•Completion of restructuring activities in the global
structured products businesses had a negative impact
on earnings.
•Tightening lending margins.
•Reducing run rate costs while maintaining business
momentum and operational excellence.
INDUSTRY PROFILE
The wholesale banking sector in Canada is a mature market
with intense competition from the Canadian banks, the large
global investment banks and, to a lesser extent, small niche
investment banks and dealers. In order to compete effectively,
it is necessary to offer a complete package of solutions and prod-
ucts, with credit often being a key component of a relationship.
Additionally,it is necessary to offer international expertise in
order to service the Canadian based international corporate
client base. There are increasing opportunities for a Wholesale
Bank that offers innovative solutions and ideas which span
across products and regions.
OVERALL BUSINESS STRATEGY
•Become a top 3 dealer in Canada:
–Protect the #1 market share rankings in equity block and
fixed income trading and #2 market share ranking in
fixed-income underwriting.
–Increase share of equity underwriting and merger &
acquisitions industry revenues.
–Prudently extend credit to support top 3 initiative and
continue to hold credit default swap protection.
–Continue to support domestic franchise with niche product
and service offerings in the U.S., Europe and Asia.
•Grow proprietary trading in scalable and liquid markets.
•Achieve an attractive rate of return on the equity investment
portfolio over a medium to long-term holding period.
REVIEW OF FINANCIAL PERFORMANCE
Reported net income was $629 million in 2006, an increase of
$207 million from $422 million in the previous year. Adjusted net
income was $664 million in 2006, an increase of $113 million
from $551 million in the previous year.
The return on invested capital for 2006 was 28%, compared
with 22% in the previous year. Economic profit for the year was
$390 million compared with an economic profit of $229 million
in 2005.
Wholesale Banking revenue is derived primarily from invest-
ment banking and capital markets, investing and corporate
banking activities. Revenue for the year was $2,271 million,
compared with $1,988 million in the previous year. Investment
banking and capital markets revenues were higher than the pre-
vious year, which included a loss of $153 million related to the
reduction of the estimated value and exit of certain structured
derivatives portfolios. Excluding the $153 million loss in 2005,
investment banking and capital markets revenues were flat year
over year as strong trading revenue in foreign exchange and
significant growth in equity commissions and merger and
acquisitions revenue was offset by lower interest rate and credit
trading and debt and equity underwriting revenues. Revenue
from the equity investment portfolio increased due to higher
security gains. Corporate banking revenue increased due
primarily to growth of credit portfolio.
Provisions for credit losses were $68 million in 2006, an
increase of $16 million from $52 million in 2005. Provisions
for credit losses in the Wholesale Banking segment comprise
allowances for loan losses and the accrual costs for credit
protection. The change in market value of the credit protection,
in excess of the accrual cost, is reported in the corporate seg-
ment. The accrual costof credit protection in Wholesale Banking
in 2006 was $48 million as compared to $52 million in 2005.
Wholesale Banking holds $2.9 billion in credit protection
against the lending portfolio, a decrease of $0.3 billion from the
end of last year. Wholesale Banking continues to proactively
manage its credit risk through active management of the credit
protection portfolio.
Risk-weighted assets of Wholesale Banking increased by
$1 billion to $34 billion this year, primarily related to an increase
in corporate lending exposures.
Expenses were $1,312 million, compared with $1,325 million
in the previous year. The decrease related primarily to lower com-
pensation expense, reflecting staff reductions from completion
of the exit of the global structured products businesses and was
partially offset by higher restructuring costs.